The concept of LLP in India was introduced off late in 2008 by enacting the LLP Act, 2008 thereby allowing businesses to be registered as a new and hybrid structure. It was anticipated at that time that many corporate houses would consider LLP as a vehicle to run their business operations, mainly due to lower administrative compliances and ease of repatriation of profits to its partners. Many small and medium enterprises (SMEs) consider starting business operations in an LLP in its initial years of business owing to its advantages and can consider for expansion by merging an LLP into a Company. But After the enforcement of new Companies Act, 2013, there was a complete ambiguity as to whether LLP can merge with any other company or not.
Provisions relating to mergers of Companies/LLPs:
> Companies Act, 1956
Section 391 to 394 of the erstwhile Companies Act, 1956 dealt with the provisions of compromise, arrangement and amalgamation between companies and its members/creditors. Importantly, Section 394 of the Companies Act, 1956 allowed a body corporate (such as LLP) as a transferor entity in a scheme of amalgamation to merge with an Indian Company. So, LLP could be merged with the Company as per the old Companies Act, 1956.
> Companies Act, 2013
Section 230-232 of the Companies Act, 2013 provides merger and amalgamation between two or more companies only and not LLP. Section 234 of the Act provides for merger and amalgamation of company with foreign company. Foreign company includes body corporate so thereby allowing merger and amalgamation of Indian company with foreign LLP and not Indian company and Indian LLP.
> Limited Liability Partnership Act, 2008
Section 60 to 62 of the LLP Act deals with compromises, arrangements, reconstruction and amalgamation of LLPs which are similar to that of the Companies Act, 2013.
The provisions of the Companies Act, 2013 and the LLP Act, 2008, provide for amalgamation of companies with other companies and LLPs with other LLPs under the respective Acts and the interconnect between the two i.e. merger of an LLP with a company or vice versa is neither specifically permitted nor specifically prohibited and that’s why many LLPs approached various National Company Law Tribunal (NCLT) with the scheme of merger and amalgamation between LLP and Companies.
Various Rulings of tribunal on similar matter
In the past the Mumbai Bench of the NCLT had permitted a scheme of amalgamation (filed under section 394 of Companies Act, 1956) for merger of Vertis Microsystems LLP with Forgeahead Solutions Private Limited. Further, a similar scheme for amalgamation of a registered Indian partnership firm, with an Indian company was placed before the Ahmedabad Bench of the NCLT for its approval. The Ahmedabad Bench of the NCLT held that since a registered partnership firm did not fall within the ambit of the term ‘company’ as per the 2013 Act, it should not be permitted to be merged with a company.
Case of Real Image LLP V.S Qube Cinemas Private Limited
In June 2018, the Chennai bench of NCLT sanctioned a merger of M/s Real Image LLP with Qube Cinemas Private Limited. The merger was sanctioned under provisions of section 230 to 232 of the Companies Act, 2013.
NCLT Chennai bench, invoking the legal principle – “casus omissus” and sanctioned the scheme on the following grounds: ─
- All statutory requirements needed under sections 230 to 232 were complied with.
- Provisions of the erstwhile Companies Act, 1956 permitted a merger between LLP and a company.
- Since merger of a foreign LLP into an Indian company is permitted under section 234 of the 2013 Act, it would not be appropriate to assume that an Indian LLP can’t be merged into an Indian company.
NCLT noted the following while allowing the scheme:
The legislative intent of enacting the LLP Act, 2008 and the Companies Act, 2013 was to facilitate ease of doing business and creation of desirable business environment for companies and LLP.” The Tribunal highlighted the fact that, “merger of two or more LLP and Companies has been provided for in the Companies Act, 1956 however, there is no specific provision in the Companies Act, 2013. Therefore, this is a case of casus omissus.” Further, it inferred that “if the intention of the parliament is to permit a foreign LLP to merger with an Indian Company, then it would be wrong to presume that the Act prohibits a merger of Indian LLP with an Indian Company and there does not appear any express legal bar to allow/ sanction merger of an Indian LLP with an Indian Company.
Aggrieved by the said order, the Ministry of Corporate Affairs, represented by the Regional Director, South Zone at Chennai and Registrar of Companies, Chennai jointly filed an appeal before the National Company Law Appellate Tribunal (NCLAT) challenging the order passed by the Chennai bench of NCLT.
Question before the NCLAT for its consideration
Whether amalgamation of an LLP with a company incorporated under the provision of the Companies Act, 2013 or 1956, is permissible under the provisions of section 230 to 232 of the Companies Act, 2013?
Observation of NCLAT
The NCLAT observed that even though there is no express enabling provision for merger of LLP into a company directly under the Act, the legislature has enacted enabling provisions under the Act for registering the LLP as a company under Section 366. This facilitates merger of such LLP registered as a company with another company subsequently.
The NCLAT noted that the principle of ‘casus omissus’ can’t be applied by courts or tribunals except in the case of clear necessity and when reason for it can’t be found in the four corners of the statute itself.
Ruling of NCLAT
The appeal was upheld, and the merger was rejected by the NCLAT.
Our opinion
We are having a view that the provisions must be incorporated in the Companies Act allowing merger and amalgamation between and among the Body Corporate i.e Company and LLP for ease of doing business. LLP and Company both are widely prevalent form of business structures in the corporate world in India and by allowing seamless mergers between these two would facilitate ease of doing business and more M&A activities.
Conclusion
Presently, Merger between LLP and Company are not allowed as there is no express provision in the Companies Act, 2013. We have seen that the NCLAT has denied the merger of an LLP with a company. This decision would limit the ability for direct mergers / arrangements / reconstruction amongst the companies and limited liability partnership in future in India. However, as of now the LLP can follow the process for registration as a company under the Section 366 of the Companies Act, 2013 and then seek merger with an Indian company in the permitted manner.
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